Analysts: Schwab could face up to $1 billion in YieldPlus damages

In a “worst-case” scenario, Charles Schwab could face up to $1 billion in damages and settlements related to its YieldPlus mutual fund, analysts Matt Snowling and Bill Jackson of FBR Capital Markets said in a research note today.

An outcome of that magnitude “would require additional capital,” they added.

Schwab disclosed in its earnings release today that it could face up to $890 million in damages in a class-action suit filed in federal court by shareholders of its YieldPlus short-term bond fund. “It is likely that such a liability would exceed available (insurance) coverage,” Schwab said. That case is scheduled to go to trial May 10.

Separately, Schwab set aside $11 million in the first quarter to cover possible damages in a separate suit filed by YieldPlus shareholders in state court in California.

The Securities Exchange Commission is considering filing civil charges against the company in the matter.

Schwab also noted that it “remained the subject of 194 individual arbitration claims seeking $34 million in damages” related to YieldPlus, “for which the company has been accruing reserves.”

Earlier this month, a federal judge in San Francisco said the fund’s managers violated the investment advisers act when they put more than 25 percent of its assets in mortgage securities without shareholder approval.

Schwab raised $564 million in a stock offering in January, mostly to support growth of its bank. When asked if the company might need to raise more capital, Gable said, “When we sized the offer in January we factored a range of contingencies into the thinking. We can’t say we’ll never be back in the market, but we did consider the contingencies very carefully at the time of the last offer.”